Theodore I Sherman (Trustee of Walbi Trust) and Theodore I Sherman (Trustee of Janbi Trust) v. Minister of National Revenue, [1976] CTC 2207, 76 DTC 1170

A J Frost:—This is an income tax appeal from a Notice of Reassessment dated August 9, 1973 in respect of the appellant’s 1970 taxation year wherein legal expenses in the amount of $12,803 were disallowed on the ground that the said expenses were not incurred in preparing, instituting or prosecuting an objection to an assessment of tax under the Income Tax Act as it was in force in the year under objection.

This appeal was heard concurrently with the Janbi Trust appeal on common evidence, the amount in dispute, the taxation year and the circumstances being identical except that the company involved was Janbi Holdings Limited.

At the hearing, counsel for the respondent moved that an order quashing the appeal should be issued on the ground that it was not properly constituted in law because all the trustees should have acted together and have been parties to any action on behalf of the trust. Counsel contended that, because only one of the trustees was named in the Notice of Appeal, the appeal was improperly constituted. Counsel for the appellant replied by stating that he was caught unawares, as this matter was brought up at a very late date and his opponent had not properly cited the case on which he apparently relied in making the motion.

It is understandable that, before I can deal effectively with the subject matter of the appeal, I have to dispose of the said motion, and in order to do that, I shall first summarize the facts which gave rise to the present appeal.

The Walbi Trust was settled in 1964 and shortly thereafter acquired the issued shares of Walbi Holdings Limited, the owner of the Bick Pickle Company. In 1967 the assets of Walbi Holdings were distributed to its shareholders, the trustees of the appellant trust. Walbi Holdings, having distributed its assets, then obtained an order for dissolution, effective February 12, 1968. On or about the date of dissolution, the company received a reassessment notice for $1,000,000 with respect to its 1966 taxation year. Under Ontario law, the trustees, as former shareholders of the company, became liable for this assessment, but were helpless to reply, as only the non-existent company could object to the assessment. This predicament was resolved by asking the Ontario Legislature to re-incorporate the company by a special Act of the Legislature. A private bill was enacted which restored the corporate status of the company under another name. This unique procedure enabled the company to object to the assessment, which it proceeded to do. The objection was subsequently allowed, the Minister of National Revenue having acknowledged his error.

One would expect that this would be the end of the story. However, the legal and accounting activities, including the preparation of the private bill to revive the corporation, the drafting of the Notice of Objection to the reassessment, and the necessary consultations in connection with these various actions, required the time and services of professional experts and cost a considerable amount Of money. At that time the trustees were the only persons who were able to act on behalf of the defunct company, the net assets of which they now administered under the name Walbi Trust. Who else could or would have challenged the respondent’s assessment? It was, in fact, the trustees’ money which was at stake. Looking through the “corporate veil” they were the company. They, and nobody else, could have employed the professional services needed in order to revive the company and file a Notice of Objection.

The professional fees were accordingly paid by the trust and deducted as an expense under paragraph 11 (1)(w) of the old Act. The Minister disallowed the claim. One might have expected the Minister of National Revenue to say “if the interested parties had not gone through all the trouble caused by the reassessment, the mistake which I made would not have been corrected, and it is therefore only logical and fair that the cost of the professional fees should be deductible from the income of those persons who were forced by me to incur those expenses”. As a matter of fact, one could even argue that if he had wanted to be fair, the Minister would have “picked up the tab”, but he did not. He disallowed the deduction of the said expenses. in reassessing the trust, the Minister said that these fees had not been incurred for the purpose of lodging an objection against an assessment of an entirely different legal entity, the company. I cannot say that this line of thought or this assessing practice impressed me as reasonable or fair. One should, in cases of this nature, apply a fair amount of realism in evaluating the juridical relationships which Caused the confusion.

The revival of the company had no other purpose than to enable it to file the Notice of Objection, and once this objective had been reached, the company could, for all purposes, be again considered non-existent. The company’s assets and income-producing Operations had long since been taken over by the trustees, who from now on would enjoy the benefits and carry the obligations connected with those operations. If there were at any time a reason to look through the corporate veil, then it was at this time. In reality, only the facade had changed. The beneficial owners of the assets were still the same people who had formerly exercised their rights through Walbi Holdings Ltd. It is true that the objection against the $1,000,000 reassessment and the attempt to nullify this assessment had been on behalf of the defunct limited company, a a separate legal entity, and not by the trustees on behalf of their trust. It is also true that, when Mr Sherman, as a trustee acting on behalf of the trust, sough to deduct those expenses, he deducted them from the income of the trust. However, the trust was, in this particular situation, the successor to the limited company, and had in fact to shoulder these expenses as a result of the erroneous assessment by the respondent on the taxable income of its predecessor. It It really would be extremely inequitable now to contend that the trust had nothing to do with the reassessment of the limited company and the struggle to rectify it. Everything which would have affected the obligations of the limited company taxwise or otherwise was in fact pertaining to the financial interests of the trust. The trust was the only available, and the most interested, party that could object to the reassessment of the limited company because, in reality, that reassessment greatly affected the financial interests of the trust. For this reason, it seems to me that the deductibility of these legitimate expenses should be allowed to the party that actually incurred those expenses in a justifiable action to protect its interests, irrespective of the juridical construction under which those interests were held.

When counsel for the respondent opened the case, he contended that the appellant had not been competent to launch the appeal as ail the trustees should have unanimously signed and filed the Notice of Objection and the Notice of Appeal. As it was, only Mr Sherman had done so, and that was, in the opinion of respondent’s counsel, a fatal mistake.

The evidence established that everybody concerned knew about the appeal and that all the trustees had been consulted and agreed to this action. Under the Income Tax Act, a trust is considered to be a legal entity, a quality which a trust normally doesn't have. Ordinarily the trustees of a trust are the ones who legally own the assets of the trust and are responsible for its administration. It is because of this legal ownership of trust property that the trustees must, as a general proposition, act together and unanimously if the financial liabilities of the trust are at stake. The trustees are not, as in the case of a partnership, legal agents for each other. They are individually and severally responsible, as they hold legal title to everything which is supposed to belong to the trust. In a tax case like the present one, the situation is entirely different. In the first place, there is no specific financial risk involved which a trustee could impose on his colleagues by lodging a tax appeal. What Mr Sherman, as a trustee in this case, had done, was to lodge an appeal on behalf of the trust to a quasijudicial tribunal which, by the very nature of its assignment, has the obligation to apply the law on the basis of the facts, not only within the scope of what the parties themselves would like to bring forward, but also on whatever grounds that tribunal might become aware of during the disclosure of the relevant facts. The Board has a duty to administer the law, keeping in mind that the appeal is a matter of public concern.

In lodging the present appeal, Mr Sherman, as trustee, did his duty by bringing this dispute before the Tax Review Board and acting as an agent for the trust, which, for the purposes of the administration of the Income Tax Act, had to be considered as a separate legal entity. His action, which met with the approval of his colleagues, could never be interpreted as having been harmful to the trust or to the other trustees. The dispute was properly brought before this Board, and it is obvious that none of the other trustees, even though their signatures may not have been on the Original Notice of Objection or on the Notice of Appeal, could have been hurt by the lodging of this appeal on behalf of the trust, which is a legal entity for income tax purposes. The other trustees could only benefit by it, and the decision of the Court of Chancery in England in Luke v South Kensington Hotel Co (1879), 11 Ch D 121 (CA), per Jessel, MR at page 126; 43 Digest 795, 2325) cited by counsel for the respondent, couid not make any difference in this case at all. This decision had nothing to do with administrative law or with tax law and still less with the Income Tax Act as it is now applicable in Canada.

Returning now to the main issue, it follows from what I have said that the appeal was correctly lodged, that the appellant in this appeal represented the trust of which he was a trustee, that he, as well as his co-trustees, had a legitimate interest at Stake, and that for that reason the action was justified and properly brought before the Board.

The appeals are hereby allowed in full and referred back to the Minister for reassessment accordingly.

Appeals allowed.